Latest reading on home building shows bigger slowdown than expected as pace falls below 2 million; permits also weaken.

By Chris Isidore, CNNMoney.com senior writer

April 18, 2006: 11:15 AM EDT

NEW YORK (CNNMoney.com) -
Home builders hit the brakes in March, cutting the number of housing starts and new permits in the face of rising mortgage rates and a growing glut of new homes on the market.

The Census Bureau reported that housing starts slumped nearly 8 percent to an annual rate of 1.96 million in March from a revised 2.13 million pace in February. Economists surveyed by Briefing.com had forecast the rate would slip to 2.03 million last month.

It was the second-slowest pace of housing starts over the last 12 months, trailing only December.

Part of the slippage could be due to a burst of building activity in January, which was the warmest January on record in the United States. At the time, some housing economists suggested that builders got an early jump on some building they otherwise would have delayed until the spring.

But higher mortgage rates have cooled off real estate markets overall. Mortgage financier Freddie Mac reports that the average 30-year fixed rate mortgage is now 6.49 percent, the highest since summer of 2002.

And with the cooling of home buying following a record year for home construction, there has been a significant build up in new homes available for sale on the market, according to a separate Census Bureau report. One in five builders has also reported an increase in the cancelation of new home orders in recent months.

All of these factors have raised fears by some economists that recent record home sales and sharp home price increases have led to a real estate "bubble" that may burst, sparking big price declines in many markets across the country.

Even if prices don't decline, a slowdown in home building has big implications for the broader economy, as residential construction has been a particularly strong engine for consumer spending and job growth in recent years.

David Seiders, chief economist for the National Association of Home Builders, said that in light of those concerns and the increase supply of homes on the market, the slowdown in building is a good thing for the market.

"The unsold inventory numbers have been looking pretty flush, and we don't want that to go too far," he said. "I've been telling builders, 'Hey we are in a cooling down process and you should behave accordingly.' I am looking for housing starts and permits to slide gradually throughout the year from unsustainable heights last year."

The drop in building activity came across all regions, including the South and the West, where the warm January weather was more typical.

And the slowdown in home building is even greater in the market for single-family homes, where starts fell to 1.59 million, the lowest since March 2005. The 12 percent slide in single-family starts compares to the 7.8 percent overall decline. Starts of home projects of five or more units rose 18 percent.

Building permits, which are generally seen as a barometer of builder confidence in the market and are less affected by weather, also fell more than economists had expected last month.

They reached an annual rate of 2.06 million from 2.18 million in February. Economists had forecast a more modest decline to 2.1 million.

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